Inflation - Reasons and Solutions
In early 2005, enterprises and consumers in Vietnam may face an increase of prices. According to the Vietnam Coal Corporation, price of coal for cement production increased by VND9.700 per tonne from January 1, 2005. The Vietnam Cement Manufacturers’ Association has asked the Government to increase prices of cement in the 2005-2010 period to around US$60 per tonnes. Steel manufacturers have been ready for a new increase in their products’ prices. The price of automobiles has risen by 15 per cent while the price increase of electric and electronic goods has been put at between 10 and 20 per cent. The rice price is predicted to see complicated developments in 2005 even though Vietnam is expected to produce between 35.8 million and 36 million tonnes of rice this year.
Reasons of inflation
According to studies of a group of researchers at the Ho Chi Minh City University of Economics, in four recent years, prices tended to increase in the first and fourth quarters, and rise slightly or drop in the second and third. However, in 2004, this rule was no longer correct as the consumer price index (CPI) saw an unceasing increase from 4.9 per cent to eight per cent and even in the second and third quarters the CPI continued to rise. As a result, the CPI in the first eight months of 2004 was 8.3 per cent higher than that of December, 2003. According to Dr Nguyen Thi Ngoc Trang, head of the research group in Ho Chi Minh City, this was due to a high price increase of important imported goods and materials, which resulted from high demand in the world market. China, for example, with its population accounting for one fifth in the world, has a huge demand for oil and petrol, food, and fertiliser, leading to skyrocketing prices. Vietnam is now integrating into the world economy with many goods and materials dependent much on import supplies. This led to an increase of over eight per cent in the CPI in the last nine months. Another reason was the outbreak of bird flu. After the disease was controlled, prices of poultry products increased highly. Also, substitutes for poultry products, such as pork, beef and fish, saw a huge rise in their prices. One more reason was the impact of the salary increase. The announcement on salary increases in October, 2004, led to an increase in prices of consumer goods. The research group pointed out that money circulation was also a reason for a high inflation rate.
Solutions
The research group has proposed measures to control inflation in Vietnam. Accordingly, two tools in monetary policies, required reserves and saving interest, should be used. The State should tighten its monetary policies by increasing required reserves from two to five per cent for under 12-month deposits in Vietnam dong and from four to eight per cent for deposits in foreign currencies, as well as increasing saving interest rates to attract more money from circulation. However, the increase of required reserves will trouble credit organisations, so this is just a short-term solution. In addition, commercial banks do not want to increase their saving interest rates, which may make their business less effective or even unprofitable when they are unable to increase interest rates of their loans.
A popular solution for drawing money from circulation, helping reduce price increase pressure, is to issue governmental bonds. For example, some branches of the Vietnam Bank for Investment and Development in provinces and cities have been allowed to provide loans, not exceeding VND 50 billion, for local budget to help local authorities to have capital for works assigned to contractors. This helps contractors avoid going bankrupt and the banks get their money back.
Also, money supply or credit growth can be controlled. In Vietnam’s case, as a developing country with under-developed capital and currency markets and a dollar based economy, inflation control measures by the State Bank of Vietnam should be the control of money supply and credit growth, which are more effective than the control of interest rates in developed countries.
Regarding a high increase in prices of goods and materials, which produce great impacts in several industries, such as steel, cement and fertiliser, the State should use its national reserves to stabilise prices. If this measure is ineffective as national reserves are not adequate to keep prices low, import tax of materials should be cut. If the measure proves it ineffective, import tax on finished products and substitute products should be cut.
Apart from these above mentioned measures, Vietnam should promote the equitisation and rearrangement of State-owned enterprises. Also, a fairer competition environment should be created for enterprises of all economic sectors. In particular, Vietnam should break monopolies and expand competition in services in which value added may be created such as transportation, telecommunication, banking and insurance. Furthermore, in the coming time, budget expenditures should be spent more reasonable, taking into account the short-term (for social life stability) and long-term interests of the economy.
Vietnamese
